When federal employees are trying to choose a time to retire, they often hear that age 62 is the “magic” age for FERS employees. But why that? Well, although there is no magic retirement age that works for everyone, there are four significant incentives for FERS employees to wait until 62 to retire. So, let’s dive into some of the factors you should consider when deciding whether age 62 is the right age for you to set sail.
1. Retire With Limited Years of Service
If you’re a federal employee who started your career later in life, age 62 can be important since you can retire with an immediate pension with only 5 years of service. 62 is also an important age if you retired under the MRA plus 10 option with less than 20 years of service and want to avoid the pension reductions.
2. Social Security
Another important factor to consider about age 62 is that Social Security benefits become available. Social Security availability is also why federal employees retiring at this age are not eligible for the FERS supplement. Since the supplement’s purpose is to bridge the income gap for retirees not yet eligible for Social Security benefits, it makes sense that once Feds reach age 62, they are no longer eligible for the supplement.
3. Cost of Living Adjustment
The third reason why many FERS employees wait until age 62 to retire has to do with Cost-of-Living Adjustments (COLAs). COLAs are automatic pay increases tied to inflation and help lessen the impact of the rising costs of living on your pension. For regular FERS retirees, COLAs begin at age 62.
Now the significance of the COLAs can’t be overstated. Although COLAs might not be sufficient to completely mitigate the effects of high inflation, they can help you keep up with rising costs and may help you avoid having to substantially increase your TSP withdrawals. This is huge since the last thing you want is to put too much demand on your TSP early in retirement and risk depleting your account.
Note: For FERS Special Category retirees (Law Enforcement Officers, Firefighters, Air Traffic Controllers, etc.), COLAs begin right away regardless of retirement age.
4. The 10% Bonus
Lastly, what is likely the key reason many federal employees wait until age 62 to retire has to do with the formula used to determine your pension amount. To illustrate this, let’s look at the standard FERS retirement formula, which is your average highest-paid consecutive 3 years of service (“high-3”), multiplied by your years of creditable federal service and by a 1 % multiplier.
However, here is where the major incentive lies, if you retire under an immediate retirement option at age 62 or older and have at least 20 years of service, your pension multiplier gets a 10% increase from 1% to 1.1%.
Now some of you may be thinking, “big deal” 1% vs. 1.1%. But that’s a 10% raise to a paycheck that you’ll receive for the rest of your life. That could be incentive enough for some to wait a couple of years to retire.
Note: This bonus doesn’t apply to Special Category Employees who have a different pension multiplier.
Final Thoughts
Part of any sound retirement planning strategy involves choosing the right age for you to retire. And although there are obvious incentives to retiring at 62 or older, retirement planning is about more than just numbers. As a financial planner, I’ll be the first to tell you that numbers are important, but they’re only a part of the retirement planning process. An equally important part of planning for retirement is taking your happiness and health into consideration. Could it make sense to wait to retire at 62? Definitely, but that decision should be based on your financial situation, needs, and goals. If you need help sorting through all the factors that go into making a wise decision about when to retire, consult with a qualified financial planner.
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2023 Legislative Change Notice
The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.
